2.1 Demand

What is demand?

Demand is the relationship between the price of a good and the quantity consumers are willing and able to buy at each price, holding other factors constant. The law of demand states that as price rises, quantity demanded falls, and vice versa — creating a downward-sloping demand curve.

Why demand curves slope downward

Two effects explain the law of demand: the substitution effect (a higher price makes consumers switch to cheaper alternatives) and the income effect (a higher price reduces purchasing power, so consumers buy less). Together these cause quantity demanded to fall as price increases.

Movement vs. shift

A change in price causes a movement along the demand curve (change in quantity demanded). A change in a non-price determinant — income, tastes, prices of related goods, expectations, or number of buyers — causes the entire curve to shift, changing demand at every price level.

Key terms

Law of demand

As price increases, quantity demanded decreases, and vice versa, all else equal.

Demand curve

A downward-sloping graph showing the inverse relationship between price and quantity demanded.

Substitution effect

Consumers switch to relatively cheaper goods when a good's price rises.

Income effect

A price change alters consumers' real purchasing power, changing how much they buy.

Determinants of demand (shifters)

Income, tastes/preferences, prices of related goods, expectations, and number of buyers — these shift the entire demand curve.

Try an AP-style question

What happened when price fell from $4 to $3?

1. Demand fell by 30
2. Demand shifted right by 30
3. Quantity demanded rose 30
4. Supply increased by 30